Supreme Court ruling could threaten Apple’s 30 percent app commission

A narrowly divided Supreme Court is allowing a group of consumers to move forward with a lawsuit charging that Apple overcharges customers for App Store purchases. Apple had asked courts to throw out the lawsuit, arguing that the law only allowed app developers, not customers, to bring such a case.

The lawsuit has been underway since 2011 and is nowhere close to resolution. The stakes are high. Apple’s iOS platform is notable for completely shutting out alternative means of app distribution. Other major software platforms—including Android, Mac OS, and Windows—offer customers the option to download and install software they acquire from third parties without paying a commission to the platform owner. But ordinary iPhone users—those who are unwilling or unable to jailbreak or use developer tools—have no way to install apps other than through the official App Store.

Plaintiffs in this case argue that Apple’s 30 percent commission on app sales wouldn’t be viable in a competitive app distribution market. The class-action lawsuit seeks refunds on behalf of millions of users who have paid inflated prices for apps as a result of Apple’s exclusionary practices.

Today’s Supreme Court ruling doesn’t decide the larger question of whether Apple actually is abusing its control over the App Store to overcharge customers. It just means that the case can go forward. But if plaintiffs ultimately succeed, it could not only force Apple to refund money the company collected from users over the last few years—it could also put pressure on Apple to open up the iOS platform, allowing users to install third-party software without paying Apple for the privilege.

Apple based its case on a 1977 case about brick prices

In the 1970s, the state of Illinois sued a company called Illinois Brick, arguing that it had overcharged for bricks used in public projects. However, the bricks had passed through various contractors during the construction process. In a 1977 ruling, the Supreme Court said that only these contractors—not the state itself—could sue Illinois Brick for its high prices.

Apple argued that the same logic applies to its App Store. In Apple’s view, customers buy apps from developers, who in turn pay Apple a 30 percent commission for distribution services. So if Apple is overcharging for app distribution, only distributors, not customers, have the right to sue.

When Supreme Court justices considered the case in November, justices quickly pointed out an obvious issue with this argument: when you buy an iPhone app, Apple is the company that charges your credit card.

“The first sale is from Apple to the customer,” said Justice Sonia Sotomayor. “It’s the customer who pays the 30 percent.”

When I initially wrote up the case, I described Apple’s argument as “confusing and counterintuitive.” The court’s four liberals seemed to agree during the November deliberations, and all four liberals wound up voting against Apple in Monday’s ruling. They were joined by one of the court’s five conservatives, Justice Brett Kavanaugh, who wrote the majority opinion.

“It is undisputed that the iPhone owners bought the apps directly from Apple,” Kavanaugh wrote. “Therefore, under Illinois Brick, the iPhone owners were direct purchasers who may sue Apple for alleged monopolization.”

Kavanaugh described this as a “straightforward” application of antitrust law and prior Supreme Court precedents.

Four conservatives sided with Apple

The court’s other four conservatives, on the other hand, bought Apple’s argument that what ultimately mattered was the fact that app developers—not Apple—determined app prices. If consumers were harmed by high app prices, this occurred only because app developers were able to “pass on” Apple’s 30 percent commission. Hence, if Apple was abusing its market power, only developers could sue.

If consumers win their lawsuit against Apple, the court will need to estimate how much of Apple’s 30 percent commission has been “passed on” to customers. That’s not an easy calculation to do—and it’s not a problem that comes up if developers sue Apple instead. For the four conservative justices in the minority, that was the decisive consideration.

But the court’s majority wasn’t persuaded that this justified abandoning the straightforward rule the high court articulated 40 years ago—that customers can sue their direct suppliers.

“Apple’s theory would require us to rewrite the rationale of Illinois Brick and to gut the longstanding bright-line rule,” Kavanaugh wrote. “Apple’s line-drawing does not make a lot of sense, other than as a way to gerrymander Apple out of this and similar lawsuits.”

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